Merger Readiness: Maximizing Best Practices Joel Sinkin, President Transition Advisors, LLC
Merger Readiness:
Maximizing Best Practices
Joel Sinkin, President
Transition Advisors, LLC
Transition Advisors, LLCNational consulting firm working exclusively with accounting
firms on issues related to ownership transition
Managing the Merger and Acquisition Process
Zoom versus face to face
It starts by creating a roadmap from beginning to the end. We have narrowed it down to a 7-step process:
Roadmap to Follow
• Identifying target firms and making solicitations
• Gathering preliminary data and prepare to share same; must haves; goals
• Intro meetings
• Non-binding offers: Make them complete
• Due diligence
• Final agreement drafts
• Transition clients and staff plus integration
We have a business plan that identifies our
strategic goals for mergers and/or acquisitions.
We have a written plan for what strategic goals we have for mergers and acquisitions. The plan will guide the type of firms we target, the type of deal structure we use, and will be shared with all the constituents within our firm and the candidate firm that are responsible for executing the plan.
The strategic objectives we develop could include:
• Growing our firm to become stronger and more profitable
• Expanding our geographic markets
• Acquiring new niche services such as IT Consulting/HR Consulting
• Increasing our competitive positioning in our market
• Obtaining more clients to cross-sell our services
• Strengthen our own succession team with new younger leaders
• Merging Up
• We have partner unity
Knowing your objectives dictates deal structure, candidates that make sense…
We have identified the goals, outside resources we will need and
prepared them to assist us as needed and what we will do solo.
• Finding merging partners:
o Develop databases, solicit through letters, phone, networking and advertising versus consultant versus broker
• Knowing the alternative deal structures, valuing firms and benchmarks
• Drafting agreements. Role of attorney.
• IT
• Financing
• Consultants
1) Who is: putting together the information, identifying candidates, managing the meetings, negations, due diligence and integration.
2) How will the firm inform other partners and when as to carrying aspects of the deal
We have identified the information we shall seek
from merger candidates.
• Client make up
• Staff info including roles and compensation
• Partners: goals, what equity means, future
• Current ownership agreements and obstacles possible such as buyout formulas, vesting, mandatory retirement…
• Services offered, not offered
• Metrics
• Virus impact
We have identified the must haves for target firms
with regard to fit in terms.
• Client make up
• Services offered
• Size
• Location
• Culture (3 tests)
• How the merger meets the short and long terms goals
Roadblocks to be
Prepared For Time
• Adversarial nature
• Messages you send
• Leaking pending to merger to
marketplace, clients, staff
• The 13th time you read the
agreement
• Opening door to competition
Roadblocks
• Unity of Partners
• Capacity
• Emotions
• Transition Issues
o Staff
o Clients
• IT
Roadblocks
• Equity
• Firm Name
• Communication
• Unneeded ‘must haves’
o Staff
o Leases
Some cultures tougher to mix then others:
▪ eat what you kill versus one firm client.
▪ Retainers, fixed fees, time and billing, value billing
Packaging Our Firm as an Ideal Solution:
Best Practices
Four C’s: The baseline for knowing you have the
right or wrong firm.
• Chemistry
• Capacity
• Continuity
• Culture
We are prepared to share appropriate information about our firm
in order to create interest from candidate firms in our firm.
• Preparing a practice summary sheet
• An organization chart
• How decisions are made in the firm
• Platform of services offered
• Sharing ownership agreement
• What success looks like
Understanding Methods to Structuring the
Transition of a Practice through an External Sale
1. Straight sale
2. Merger
3. Two stage deals• Sell equity but stay on
• Best transition
What if some partners want to slow down and others
want to grow and stay on for many years?
• Most multi-partner firms have this situation
• Partners seeking immediate role reduction do a sale
• Partners seeking to slow down in 5 years or less do a Two Stage Deal
• The Partners looking to stay on merge
o What does equity mean when they merge?
o Are there retention elements?
o How does their compensation and role change?
o What about their buyout?
Five Main Variables for
Valuing a Practice
1. Cash up front, if any
• Dependent on time of year
• The deal’s cash flow
• Treatment of accounts
receivable
• Virus impact
Five Main Variables for Valuing a Practice
2. Retention clause/guarantee
• Collection deals, deals by percentage
• Fixed deals
• Limited guarantees
• Economy clause
• Virus impact
Five Main Variables for Valuing a Practice
3. Profitability
• Seller’s current profitability / billing rates
• Buyer’s anticipated profitability / billing rates
• Tax ramifications of deal structures
(goodwill vs current deduction)
4. Length of the payout period* Virus impact
Five Main Variables for Valuing a Practice
5. Multiple
• Cause vs effect
o Multiple = effect
o Balance = cause
• Basic rule:
o Lower down payment, longer payout period
o Higher profitability, longer guarantees = higher multiple
• IT helping or hurting
• Buyer versus seller’s marketplace
We are prepared to replace as necessary the
technology and other systems of a merged firm.
• How when are we integrating technology platforms.
• Is the IT conversation being done with or without outside sources
• Have we anticipated the costs; typically $10,000 per person. How financing? Other integration expenses
• Do we have a reasonable plan for training the personnel of an acquired firm on our technology systems?
Assessing Your Firm’s Succession Readiness
Two ways a partner can be replaced:
• Role re-allocation
• Role succession
Assessing Your Firm’s Succession Readiness
Role Re-allocation• If sufficient capacity and skill set: retiring partner’s duties are re-allocated to
remaining partners
• Can fix an over-partnered firm
• Assumes existing capacity for client management, technical expertise, admin duties
• Usually capacity still must be replaced to maintain revenue
Assessing Your Firm’s Succession Readiness
Role Succession• Don’t have excess partner capacity or
skill set-role must be replaced with a new partner
• Duties might still be shifted but existing capacity at partner level is insufficient in general
• Roles to be replaced include client management, practice development, special expertise
Assessing Your Firm’s Succession Readiness
Transitioning Roles
• 2 years minimum
• Active involvement of transitioning partner
• Replacement partners need to be staged
Assessing Your Firm’s Succession Readiness
Partner Succession Projection
RR=Role Reallocation RS=Role Succession
Partner 1-3 yrs 4-7 yrs >8 yrs
A RR
B RS
C RS
D RR
E RS
Our owner agreement is set up to handle all the
retirement buyouts of our partners without
putting a strain on the firm.
Using the litmus text
Retirement
• Methods for Valuing equity
oBook of business
o Equity
oCompensation
oHybrids
Niche Mergers
Barry Melancon during a speech Wednesday at the
Accountants Club of America:
“When you look at the top 400 firms, there are record numbers of mergers and acquisition activity of non-CPA firms,” he said. “We are
seeing those firms having to diversify skill sets and technology platforms and capabilities, and they have been doing that through acquisition of
other types of business enterprises to diversify within their own environment. About a third of the mergers and acquisitions that
occurred in 2019 actually were non-CPA firm acquisitions by CPA firms.”
Niche Mergers
How to structure:
• Establish base compensation niche partners are currently making
• Guaranty their comp remains steady so long as their revenues and time commitment remain steady
• Key is how to share growth
• Are they partners in firm, separate entity?
• Buyout
• Cash upfront requests
For More Information
Visit the AICPA Succession Planning Resource Center
https://www.aicpa.org/interestareas/privatecompaniespracticesection/strategy-planning/center.html
For More Information
Please visit our website for resources including
FREE reports, whitepapers and case studies.
1-866-279-8550
www.TransitionAdvisors.com